Public Finance Education & Nonprofit Institutions / U.S.A. University of Hawaii New Issue Report Ratings New Issue Details New Issue

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1 University of Hawaii Revenue Bonds New Issue Report Education & Nonprofit Institutions / U.S.A. Ratings New Issue $8,850,000 Board of Regents of the University of Hawaii, University Revenue Bonds, Series 2012A (R) AA Outstanding Debt $249,100,000 Board of Regents of the University of Hawaii, University Revenue Bonds AA $238,800,000 Board of Regents of the University of Hawaii, University Revenue Bonds (Taxable Build America Bonds) AA $135,390,000 Board of Regents of the University of Hawaii, University Bonds AA Rating Outlook Stable New Issue Details Sale Information: $8,850,000 Board of Regents of the University of Hawaii University Revenue Bonds, Series 2012A (R), the week of Feb. 6 via negotiation. Security: Bonds are secured by net revenues of UH s auxiliary network (the network), a subordinate pledge on legislative appropriations, and amounts on deposit in the Hawaii Cancer Research Special Fund (series 2010A-1 and 2010A-2 bonds only). Taxable series 2010A-1 and 2010B-1 Build America Bonds are eligible for federal subsidy payment equal to 35% of interest payable. University bonds are secured by a portion of moneys in the state of Hawaii s Tobacco Settlement Special Fund, a senior pledge on legislative appropriations, and a subordinate pledge of net revenues of the network. Purpose: To refund series 2001B university revenue bonds. Final Maturity: Oct. 1, Key Rating Drivers Stable Credit Characteristics: The AA rating reflects UH s deep integration in the state of Hawaii s (GO bonds rated AA with a Stable Rating Outlook by Fitch Ratings) public education system and economy. Substantial state support, prudent financial management, and a dominant market position support stable operations and a sound level of balance sheet resources. Sole Provider Status: UH s credit benefits from its broad system of campuses, university centers, and other facilities stretching across six of the state s islands. Fall 2011 headcount of 60,330 students was up nearly 20% from four years prior, and UH captured nearly 40% of Hawaii s 2011 high school graduates. Heavy Reliance on the State: Base state operating appropriations now account for approximately one quarter of annual operating revenues, with other transfers from the state providing another 11% 12%. Recent reductions in state funding challenged UH s performance, but the university implemented revenue and expense measures to maintain stability. Related Research Fitch Rates Hawaii s GOs AA ; Outlook Stable, Nov. 4, 2011 Analysts Eric Kim eric.kim@fitchratings.com Douglas J. Kilcommons douglas.kilcommons@fitchratings.com

2 Rating History Rating Action Outlook/ Watch Date AA Affirmed Stable 2/3/12 AA Affirmed Stable 9/14/10 AA Revised Stable 4/30/10 AA Upgraded Stable 3/17/09 A+ Affirmed Positive 9/20/06 A+ Assigned Stable 5/28/02 Credit Profile Close Ties to State The integrated relationship between UH and the state is a primary credit factor. Funding for the university accounted for a significant 12.1% of the state s general fund budget in the first year of the biennium spanning fiscal years 2012 and 2013 ( biennium). Base appropriations are up modestly this year after declines during the prior biennium. Capital support, through appropriations and issuances of dedicated state GO bonds, remains strong. Stable Operating Margin, Adjusted for OPEB To manage through the operating appropriation declines in the past biennium, the university instituted a series of expenditure cuts. Most significantly, UH and the state negotiated significant union concessions (namely salary reductions), including from faculty. Impressively, UH s actual compensation and benefits expenditures declined 4.9% between fiscal years 2009 and Fitch notes this decline excludes the annual cost of other post-employment benefit (OPEB) accrual. UH began reporting OPEB on its financial statements in fiscal 2008 per GAAP reporting standards. Inclusive of this liability, UH s operating margin (including endowment distributions) declined in 2008 to negative 2.6% and continued weakening, reaching negative 6.2% in fiscal Before 2008, the GAAP margin had generally been closer to break-even or slightly positive. Importantly all OPEB costs and liabilities are fully borne by the state with no actual expenditures incurred or anticipated by UH. Representatives from the state s Department of Finance confirmed the state s full responsibility for the OPEB obligation in discussions with Fitch. When adjusted by excluding annual OPEB costs, UH s operating margin remained positive since fiscal 2007, reaching 3.8% in fiscal 2010 and 4.2% in fiscal Diversifying Revenue Base In addition to expense management, increases in grants and contracts and student-generated revenues played an important role in offsetting the effects of state operating cuts. Driven by a multiyear tuition increase plan and steady enrollment gains, student-generated revenues grew to 21.7% ($314.8 million) of fiscal 2011 operating revenues. UH s board of regents recently adopted a new five-year tuition increase plan, providing a stable base of future operating support. Related Criteria U.S. College and University Rating Criteria, July 14, 2011 Revenue-Supported Rating Criteria, June 20, 2011 Grants and contracts revenue also increased and grew its share of operating revenues, reaching 34.6% in fiscal 2011 ($502.4 million). Fitch notes that UH increased funding from multiple federal agencies between fiscal years 2010 and 2011, including the National Science Foundation, the U.S. Department of Health and Human Services, NASA, and the U.S. Department of Commerce. Improving Financial Cushion Consistent modest surpluses (adjusted for OPEB) bolstered UH s balance sheet resources. The university s available funds grew 62.6% between fiscal years 2007 and Coverage of operating expenses and pro forma debt (39.2% and 96.9%, respectively, at the end of fiscal 2011) is in line with other public universities rated similarly by Fitch. University of Hawaii 2

3 Fitch notes that 43.6%, or $271.9 million, of UH s bonds are expected to be paid from dedicated non-university sources (cigarette tax revenues and tobacco master settlement funding). These streams have historically been sufficient to cover debt service to date, though tobacco master settlement projections provided by the underwriter indicate future declines to slightly below 1.0x coverage. University revenues provide the ultimate backstop in the event of coverage shortfalls, warranting the parity rating with UH s other revenue bonds. Operating Profile Enrollment Demand and Enrollment Data (Fall Semester) Total Systemwide Headcount 49,990 50,454 53,526 57,945 60,090 60,330 Institutions Full-Time Equivalents University of Hawaii at Manoa (UHM) Undergraduate 12,058 11,865 11,799 11,972 11,934 12,360 University of Hawaii at Manoa Graduate 4,159 4,170 4,286 4,457 4,397 4,126 University of Hawaii at Hilo Undergraduate 2,786 2,756 2,829 2,941 2,944 2,944 University of Hawaii at Hilo Graduate University of Hawaii at West Oahu Undergraduate University of Hawaii at West Oahu Graduate Community Colleges 14,580 14,913 16,297 18,492 19,759 19,432 Undergraduates Subtotal 29,900 30,056 31,565 34,135 35,460 35,646 Graduates Subtotal 4,322 4,447 4,702 4,993 5,073 4,812 Total 34,222 34,503 36,267 39,128 40,533 40,458 Admissions (UHM) Undergraduate Applications 10,752 10,616 11,456 12,155 11,589 11,513 Undergraduate Admissions 7,806 7,749 8,103 8,615 8,570 9,136 Acceptance Rate (%) Undergraduate Matriculants 3,913 3,908 3,827 3,985 3,833 4,117 Matriculation Rate (%) Average SAT Score Incoming Freshmen (UHM) 1,094 1,095 1,087 1,087 1,097 1,085 National Average for Incoming Freshmen 1,021 1,017 1,017 1,016 1,017 1,011 Annual Resident Undergraduate Cost of Attendance (UHM) Tuition and Mandatory Fees 4,523 5,391 6,259 7,168 8,095 9,100 Room and Board 7,185 7,335 7,564 8,493 9,410 10,279 Total 11,708 12,726 13,823 15,661 17,505 19,379 Note: Numbers may not add due to rounding. The University of Hawaii s demand profile reflects a mix of strong growth at certain expanding campuses and more stability at its most mature sites. Community colleges and the University of Hawaii at West Oahu (UHWO) both experienced substantial increases in full-time equivalents (FTEs) between fall 2007 and fall 2011 (30.3% and 74.3%, respectively). The weakened economy was the primary driver behind the rapid gains at the community college University of Hawaii 3

4 campuses. The state s economy began rebounding in 2011, as reflected in employment gains. Accordingly, fall 2011 community college FTEs declined slightly from the fall 2010 level. UHWO is the newest member of UH s overall system. After several decades as an upperdivision campus (serving primarily community college graduates), UHWO became a full fouryear institution in fall Construction on a new campus began in August 2010 and is on track to open for the fall 2012 semester. Over the next 10 years, management expects UHWO to grow from its current 910 FTEs to serve more than 7,600 students at the new campus. The flagship University of Hawaii at Manoa (UHM) and the University of Hawaii at Hilo (UHH) grew enrollment 2.8% and 19.7%, respectively, between fall 2007 and fall UHH s growth was partially driven by the establishment of the state s first school of pharmacy, at UHH s Big Island of Hawaii campus. UHH s inaugural class of 90 Doctor of Pharmacy (Pharm. D.) students entered in fall 2007, graduating last spring. The school includes four classes of 90 Pharm. D. students spread across temporary facilities at UHH. The university is pursuing $38 million in state GO bonds to finance the first phase of a permanent school of pharmacy facility. UHM serves as the flagship institution for UH and enrolls the vast majority of graduate students and more undergraduates than any other single UH campus. Recent upgrades to UHM s primary undergraduate residential facilities helped drive solid 3.6% growth in undergraduate FTEs in fall 2011 in comparison to the prior year. Management reports that out-of-state enrollment growth has also continued, despite steady tuition and fee increases. In fact, the university s Board of Regents (board) recently increased the cap on out-of-state enrollment at UHM and UHH to 35% because both campuses were on track to exceed the prior 30% cap. Financial Profile Revenue Diversity State appropriations remain a key funding source and did decline annually in fiscal 2010 and 2011 (20.8% and 2.9%, respectively) as the state dealt with tax revenue shortfalls. The change shown in UH s financial statements between fiscal years 2009 and 2010 is much more drastic but largely reflects accounting changes rather than the actual reduction in state moneys provided to the university for day-to-day operations. Beginning with fiscal 2010, the state revised its funding methodology for UH by directly allocating certain funding (for fringe benefits and debt service on state GO bonds) directly to the Department of Budget and Finance, rather than flowing it though UH s appropriations. Offsetting the actual declines in state operating appropriations during the last biennium, UH experienced consistent growth in its two other primary revenue sources student-generated revenues and grants and contracts. Both increased by double-digit margins between fiscal years 2009 and 2010 (10.5% and 18.7%, respectively) and more modestly in fiscal Steady enrollment gains and the multiyear tuition increase plan fueled the growth in studentgenerated revenues. UH s growing research profile enhanced its grants and contracts position, and Fitch views continued growth as likely. The completion of the Cancer Care Center in late 2012 should attract more medical research dollars, as it will serve as the new home for the state s only National Cancer Institute. In addition, Department of Defense spending will likely increase, as UH anticipates an additional $10 million in annual funding attributable to its status as one of five Naval University Affiliated Research Centers. University of Hawaii 4

5 Financial Summary ($000, Audited Fiscal Years Ended June 30) Statement of Operating Activities Gross Tuition and Fees 173, , , , ,772 Less: Student Aid 36,196 52,274 61,340 82,302 95,915 Net Tuition and Fees 136, , , , ,857 Sales and Services of Auxiliary Enterprises 74,642 86,633 84,200 83,597 90,939 Federal Grants and Contracts 316, , , , ,854 State/Local Grants and Contracts 24,812 30,587 32,038 28,064 18,358 Other Grants and Contracts 31,735 35,007 37,956 48,299 45,202 State Appropriations 623, , , , ,077 Gifts and Contributions 40,057 31,543 23,285 24,398 24,703 Dividend and Interest Income a 21,378 21,383 15,167 10,470 8,708 Sales of Goods and Services and Other Operating Revenues 37,993 39,284 39,620 46,655 53,919 Transfers to/(from) State of Hawaii (104,584) (82,540) (97,038) 160, ,992 Total Operating Revenues 1,203,657 1,317,261 1,377,346 1,379,974 1,427,609 Unrealized/Realized Gains Portion of Endowment Payout b 3,722 9,217 14,133 30,430 24,892 Adjusted Total Operating Revenues 1,207,379 1,326,478 1,391,479 1,410,404 1,452,501 Compensation and Benefits c 767, , , ,094 1,007,237 Supplies, Services, and Cost of Goods Sold 185, , , , ,469 Student Aid 31,593 30,162 36,297 46,314 53,411 Operation and Maintenance of Plant (Includes Telephone and Utilities) 67,325 81,449 84,115 79,506 84,741 Depreciation 65,387 71,226 79,228 87,401 85,591 Interest Expense 3,919 10,629 11,175 14,004 22,244 Travel and Other Operating Expenses 66,922 80,728 67,284 64,058 71,094 Total Operating Expenses 1,188,013 1,361,088 1,475,494 1,457,898 1,542,787 OPEB Adjustment d N.A. 88,560 94, , ,637 OPEB Adjusted Total Operating Expenses 1,188,013 1,272,528 1,380,724 1,356,377 1,392,150 Change in Net Assets from Operations 15,644 (43,827) (98,148) (77,924) (115,178) Adjusted Change in Net Assets from Operations 19,366 (34,610) (84,015) (47,494) (90,286) OPEB Adjusted Changed in Net Assets from Operations 19,366 53,950 10,755 54,027 60,351 Realized and Unrealized Gain/(Loss) on Investments 91, ,147 (124,556) (195,648) 95,339 Capital Grants and Gifts 9,840 8,426 37,653 6,771 15,523 Other Non-Operating Revenues 28,472 49,592 47,882 29,183 38,671 Other Non-Operating Expenses (47,462) (77,527) (54,396) (28,061) (41,818) Total Non-Operating Revenues/(Expenses) 82, ,638 (93,417) (187,755) 107,715 Change in Net Assets 97, ,811 (191,565) (265,679) (7,463) Change in Net Assets from Operations: 15,644 (43,827) (98,148) (77,924) (115,178) Plus Depreciation 65,387 71,226 79,228 87,401 85,591 Plus Interest Expense 3,919 10,629 11,175 14,004 22,244 Net Income Available for Debt Service 84,950 38,028 (7,745) 23,481 (7,343) a Interest and dividend portion of annual endowment distributions from UH Foundation and UH endowments. b Non-interest and dividend income portion of annual endowment distributions. c Beginning in fiscal 2008, includes annual OPEB cost, per GAAP. d Annual OPEB cost per notes in audited financial statements. N.A. Not applicable. Note: Numbers may not add due to rounding. University of Hawaii 5

6 Financial Summary (continued) ($000, Audited Fiscal Years Ended June 30) Adjusted Change in Net Assets from Operations: 19,366 (34,610) (84,015) (47,494) (90,286) Plus Depreciation 65,387 71,226 79,228 87,401 85,591 Plus Interest Expense 3,919 10,629 11,175 14,004 22,244 Net Income Available for Debt Service 88,672 47,245 6,388 53,911 17,549 OPEB Adjusted Change in Net Assets from Operations: 19,366 53,950 10,755 54,027 60,351 Plus Depreciation 65,387 71,226 79,228 87,401 85,591 Plus Interest Expense 3,919 10,629 11,175 14,004 22,244 Net Income Available for Debt Service 88, , , , ,186 Annual Debt Service 17,881 14,114 30,592 23,485 33,596 Maximum Annual Debt Service e 46,452 46,452 46,452 46,452 46,452 MADS Fiscal Year e Typical Pro Forma Debt Service e 39,134 39,134 39,134 39,134 39,134 Balance Sheet Cash and Cash Equivalents 37, ,683 53,033 47,031 71,709 Investments 571, , , ,675 1,050,493 Total Cash and Investments 609, , , ,706 1,122,202 Less: Restricted Non-Expendable and Certain Other Restricted Net Assets f 237, , , , ,182 Available Funds 371, , , , ,020 % Total Investments Classified as Alternative Assets Per Audit g Adjusted Available Funds 309, , , , ,222 Net Property, Plant, and Equipment 1,074,030 1,188,635 1,275,918 1,356,864 1,513,137 Liabilities Fixed-Rate Bonds Payable 264, , , , ,045 Total Bonds Payable 264, , , , ,045 Other Obligations Capital Leases 14,255 13, Notes and Installment Contracts Payable Bond Premiums, Deferred Bond Refunding and Issuance Costs (7,538) (7,342) (6,890) (6,567) (1,469) Total Other Obligations 7,055 6,842 (6,843 (6,567) (1,469) Total Long-Term Debt 271, , , , ,576 Total Pro Forma Debt h N.A. N.A. N.A. N.A. 623,290 Unrestricted Net Assets 154, , , , ,649 Invested In Capital Assets, Net of Related Debt 890, ,717 1,050,563 1,099,820 1,182,287 Restricted Nonexpendable and Certain Other Restricted Net Assets f 237, , , , ,182 Restricted Expendable 295, , , , ,670 Total Net Assets 1,578,270 1,753,870 1,847,969 2,052,218 2,303,788 e Calculated excluding Build America Bonds subsidy, using pro forma debt service schedule provided by the underwriter. f Includes unspent bond proceeds because Fitch does not view these as available funds. g Includes limited partnerships, real estate, absolute return, and other investments. h Provided by the underwriter and as of Feb. 1, N.A. Not applicable. Note: Numbers may not add due to rounding. University of Hawaii 6

7 Financial Ratios (Audited Fiscal Years Ended June 30) Revenue Diversity Ratios (Total Unrestricted Operating Revenues) Tuition Student Fees (Tuition and Auxiliary Revenues) Federal Grants and Contracts State/Local Grants and Contracts Other Grants and Contracts Total Grants and Contracts State Appropriations Gifts and Contributions Interest and Dividend Income Transfers to/(from) State of Hawaii (8.7) (6.3) (7.0) Revenue Diversity Ratios (Adjusted Total Unrestricted Operating Revenues) Tuition Student Fees (Tuition and Auxiliary Revenues) Federal Grants and Contracts State/Local Grants and Contracts Other Grants and Contracts Total Grants and Contracts State Appropriations Gifts and Contributions Total Endowment Distribution Transfers to/(from) State of Hawaii (8.7) (6.2) (7.0) Financial Aid Ratios Tuition Discounting (%) Net Tuition and Fees 136, , , , ,857 in Net Tuition and Fees (%) N.A Operating Performance Ratios (%) Operating Margin 1.3 (3.3) (7.1) (5.6) (8.1) Adjusted Operating Margin 1.6 (2.6) (6.0) (3.4) (6.2) OPEB Adjusted Operating Margin Liquidity Ratios (%) Available Funds/Total Unrestricted Operating Expenses Available Funds/Total Long-Term Debt Available Funds/Total Pro Forma Long-Term Debt N.A. N.A. N.A. N.A Adjusted Available Funds/Total Unrestricted Operating Expenses Adjusted Available Funds/Total Long Term Debt Adjusted Available Funds/Total Pro-Forma Long Term Debt N.A. N.A. N.A. N.A Leverage Ratios Total Operating Revenues Basis Historical Debt Service Coverage (x) (0.3) 1.0 (0.2) Historical Debt Burden (%) Pro Forma MADS Coverage (x) (0.2) 0.5 (0.2) Pro Forma MADS Burden (%) Pro Forma AADS Coverage (x) (0.2) 0.6 (0.2) Pro Forma AADS Burden (%) N.A. Not applicable. Note: Numbers may not add due to rounding. University of Hawaii 7

8 Financial Ratios (continued) (Audited Fiscal Years Ended June 30) Adjusted Total Operating Revenues Basis Historical Debt Service Coverage (x) Historical Debt Burden (%) Pro Forma MADS Coverage (x) Pro Forma MADS Burden (%) Pro Forma AADS Coverage (x) Pro Forma AADS Burden (%) OPEB Adjusted Total Operating Revenues Basis Historical Debt Service Coverage (x) Historical Debt Burden (%) Pro Forma MADS Coverage (x) Pro Forma MADS Burden (%) Pro Forma AADS Coverage (x) Pro Forma AADS Burden (%) N.A. Not applicable. Note: Numbers may not add due to rounding. University of Hawaii 8

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